Help and FAQ

Please send any and all questions by email and this FAQ and help will be improved. The definition of the data in each appendix is provided in the body of the paper or in the appendix cover page to the data.

Understanding and Using the

Asset Class Performance and Momentum Report

All of the data in the columns from “Total Return Year to Date” to “Sharpe Ratio” is the performance of each asset class, measured as of the end of last month and it comes from Morningstar, with the exception that I have to calculate the 6-month return from their successive reports. Total Return means all of the gains from price increases, interests, dividends, etc, and after expenses such as management fees. You can ignore all of the details of return and the expenses. (It does not include any fees you pay to buy or sell a fund.) R squared, Standard Deviation, Beta, and Sharp ratio are used to judge the volatility and diversity. The “annualized” returns to the right, labeled 1, 3,6,12 months are the same as the central columns just multiplied by 12,4,2,1 to make all of them comparable on a 12 month rate basis. (I added these for my son. I do not use them.)

The 5 columns labeled dx/dt are the monthly “first derivatives” of the respective performance columns. Rather than “performance” they tell you the “rate of change” of the performance columns. For example, look and you will see some class that has a negative derivative, for say the last month, yet it also had a good return for the last month. This means that the rate of return was not as good as it had been the prior month. The same can be true for any period and may be saying that the rate of return is slowing down. A positive derivative would of course say that the rate of return is getting better. The purpose of the rate of change columns is to give a warning when something is slowing down (even though still growing) or beginning to start to improve. As provided in the COP Strategy paper, there is ample evidence of the value of the momentum measurements (Period Average and APA) however, there is no evidence that I am aware of that the derivatives have any predictive value – use your own judgment.

The two operative measurements art eh momentum measurements and rankings of the asset classes. These are Period Average and APA. My research with the COP Research Model shows that the APA produces the better returns. The difference is that the Period Average is a little less sensitive to the one and three month returns, that is, the very short term. In a sense that makes the Period Average a little more conservative.

The Standard Deviation is not considered to be a really good measure of risk. Morningstar, like other large financial firms has their own proprietary method which I suspect is better for us with individual funds. Unfortunately, Morningstar’s measurements are all relative the class of the fund, thus, the class as a whole always has a risk of “average”, which is useless to judge between classes. That only leaves us with Standard Deviation. Generally speaking, the asset classes that are known historically to be the most risky, do also tend to have higher Standard Deviations. In good times the Standard Deviation of some of the riskier assets does tend to drop down to make you feel good, however, in major market corrections they are the first and the hardest to fall.

Well that’s it for the data. You use this data to select the classes you want to be in based on performance, volatility and diversity, and then go to Morningstar to select the best fund for your needs in each class.